Current Dividend Preference

AAA

DEFINITION of 'Current Dividend Preference'

A safety feature of preferred shares, whereby holders of such shares are entitled to receive dividends before common shareholders. Current dividend preference means that preferred shareholders have priority or preference over common shareholders when it comes to dividend distributions. This feature implies that under no circumstances can dividends be paid to common shareholders before preferred shareholders.

INVESTOPEDIA EXPLAINS 'Current Dividend Preference'

Dividend distributions depend on a number of factors such as the company's operating performance, level of retained earnings and payout ratio. While dividend payments on common shares are largely at the company's discretion, preferred dividends generally have a greater degree of stability. For example, consider a company, Widget Co., that has 4 million preferred shares with a face value of $25 outstanding; these shares have a stipulated dividend of 5%. Widget Co. also has 100 million common shares outstanding, on which it has been paying dividends of 20 cents. This means that Widget Co. pays out $5 million in preferred dividends and $20 million in common share dividends. If Widget Co. has a healthy financial position and is consistently profitable, paying these dividends should not cause it any problems. If it has a couple of unprofitable or marginally profitable years, however, it may consider trimming dividends on its common stock, or even suspending them altogether. But even in this scenario, it must pay the preferred shares dividend, either in this period or at a later date.

RELATED TERMS
  1. Preference Shares

    Company stock with dividends that are paid to shareholders before ...
  2. Bird In Hand

    A theory that postulates that investors prefer dividends from ...
  3. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  4. Subordinated Debt

    A loan (or security) that ranks below other loans (or securities) ...
  5. Dividend Policy

    The policy a company uses to decide how much it will pay out ...
  6. Common Stock

    A security that represents ownership in a corporation. Holders ...
RELATED FAQS
  1. What is the difference between preferred stock and common stock?

    Preferred and common stocks are different in two key aspects. First, preferred stockholders have a greater claim to a company's ... Read Full Answer >>
  2. Does issuing preferred shares offer a tax advantage for corporations?

    There is no direct tax advantage to the issuing of preferred shares when compared to other forms of financing such as common ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    A Primer On Preferred Stocks

    Offering both income and relative security, these uncommon shares may work for you.
  2. Bonds & Fixed Income

    Introduction To Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  3. Fundamental Analysis

    Valuation Of A Preferred Stock

    Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
  4. Mutual Funds & ETFs

    Should the YYY ETF Be on Your Radar?

    Why you should, or shouldn't, invest in YYY.
  5. Mutual Funds & ETFs

    How To Build A Bond Ladder?

    Bond laddering is a strategy used when building a portfolio: an investor can spread out interest rate risk and create a stream of cash flows for income.
  6. Economics

    What is the Income Effect?

    In economics, the income effect is the change in the consumption of goods caused by a change in income, whether income goes up or down.
  7. Investing Basics

    What is Treasury Stock?

    Treasury stock is a company’s own stock that it holds in its treasury for later use.
  8. Retirement

    How To Move From Nest Egg To Income?

    Income vs. a nest egg is closely tied to what most of us are ultimately interested in for retirement – maintaining our standard of living and to travel.
  9. Stock Analysis

    Is This Dividend Stock A Value Or Value Trap?

    We can say that Fifth Street Finance has had a rough year, but there's a huge difference between an undervalued stock and a stock that's cheap for a reason
  10. Stock Analysis

    Is Intel's Newly Raised Dividend At Risk?

    Intel recently raised its dividend from $0.90 per share on an annualized basis to $0.96 after failing to raise the dividend during 2013 and 2014.

You May Also Like

Hot Definitions
  1. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  2. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  3. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  4. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  6. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
Trading Center